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Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration

Author Info

Listed author(s):
  • Joshua Aizenman

    (UCSC and NBER)

  • Daniel Riera-Crichton

    (UCSC)

Abstract

This paper evaluates the impact of international reserves, terms-of-trade shocks, and capital flows on the real exchange rate (REER). We observe that international reserves cushion the impact of terms-of-trade shocks on REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of international reserves in developing countries. Developing countries' REERs seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.90.4.812
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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 90 (2008)
Issue (Month): 4 (November)
Pages: 812-815

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Handle: RePEc:tpr:restat:v:90:y:2008:i:4:p:812-815
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  1. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
  2. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1359-1397.
  3. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
  4. Pablo García & Claudio Soto, 2006. "Large Hoardings of International Reserves: Are They Worth It?," Central Banking, Analysis, and Economic Policies Book Series,in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Sc (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 6, pages 171-206 Central Bank of Chile.
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